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“All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” Arthur Schopenhauer could have been describing the journey of financial-transaction taxes (FTTs), which are somewhere between stages two and three. Exactly where will be revealed at the meeting of EU finance ministers on Tuesday (13 March), where the European Commission’s proposal for a 0.1% tax on bond and equity transactions and 0.01% on derivatives will be up for discussion.

Before the Great Contraction began in 2007, bankers had succeeded in painting FTTs as the concept of naïve idealists who knew little about the real workings of finance. This was quite a feat given that the idea had towering intellectual credentials. John Maynard Keynes had recommended it in his “General theory of employment, interest and money”, and a Nobel prize-winner, James Tobin, later developed it.

Before the financial crisis, rather than looking to “throw sand in the wheels of finance” (to use Tobin’s colourful phrase), the story propagated by the industry was that those wheels should spin ever more quickly. We were told that the faster money moved, the more efficiently it would be allocated. Bankers and hedge-fund managers would grow super-rich, but that was a minor distraction because the economy would be stronger and jobs more plentiful.

That story has been rumbled by the financial crisis.

Dynamic economies

Today, FTTs are no longer ridiculed. How could they be? The world’s most dynamic economies, including Brazil, South Korea and India, use them, Europe’s most successful large economy, along with eight other EU states, wants to adopt one, and last year approximately $38 billion (€29bn) was raised by FTTs in the 40 countries that have them. Since 1986 (and before in other forms), the UK government has unilaterally, without waiting for others to follow suit, levied a stamp duty reserve tax of 0.50% on transactions in UK equities. Despite not updating this tax to take into account derivatives and other innovations, it still raises around €3.8bn per year.

The reason why these FTTs work is that they are stamp duties on the transfer of ownership and not based on tax residence. If the transfer has not been ‘stamped’ and taxes paid, the transfer is not legally enforceable. Institutional investors who hold most assets around the world do not take risks with legal enforceability. Of the UK’s receipts from its stamp duty reserve tax, 40% are paid by foreign residents. Far from sending taxpayers rushing for the exit, this tax gets more foreigners to pay it than any other.

A negative impact?

Having lost the argument on feasibility, the financial sector and their political friends are now vigorously opposing FTTs with ever more outlandish claims about their negative impact on the wider economy. They have latched on to very preliminary estimates by the European Commission that a 0.1% FTT on equities and bonds could reduce gross domestic product by 1.7%, without waiting for the final analysis.

In its latest iteration, the Commission’s model takes into account that the overwhelming majority (85%) of investment comes from retained earnings or bank loans not subject to FTTs. Furthermore, as the Commission’s analysis said from the start, the proposed FTTs would only apply to transactions between financial institutions and would not cover companies issuing new shares. Once these factors are taken into account, the Commission’s model indicates that the estimated negative effect of FTT on GDP would fall to just 0.1%.

But this is not the complete story. It is necessary to add that the tax would fall most heavily on short-term holders of securities, such as high-frequency traders, hedge funds and bank proprietary trading desks. It would fall least on long-term holders such as pension funds, life-insurance companies and private equity firms. This would likely trigger a shift away from short-term trading in favour of long-term holding that will reduce misalignments in markets and their subsequent abrupt adjustments or crashes.

Crash course

FTTs would therefore somewhat decrease the likelihood of future crises. Indeed, among those countries that were least affected by the crash, countries with FTTs were disproportionately represented. If we conservatively estimate that the probability of crisis would decrease by only 5% as a result of the FTT, which is very low, and we take into account that on average financial crises decrease gross domestic product (GDP) by around 7%, we would have a positive impact of +0.35% of GDP due to smaller likelihood of future crisis. The total net effect of an FTT would be an estimated boost of Europe’s GDP by +0.25%, not a reduction. A more detailed version of this analysis can be found in our recent report presented to the European Parliament.

At a time when many European governments face large deficits, in large part as a result of bailing out the financial sector, it seems reasonable to expect the financial sector to adopt measures to help reduce the likelihood of future crises. To us and hundreds of other economists, the evidence is clear that an FTT adopted by all 27 EU states or by the 17 members of the eurozone would help strengthen Europe’s finances and reduce the likelihood of crises.

As the FTT is one of the first international taxes, a proportion of its revenues should be earmarked to finance the solutions to some of the world’s most difficult international problems, such as poverty and climate change. Therefore, an FTT could help foster somewhat fairer and more sustainable growth in Europe and globally.

Professor Stephany Griffith-Jones is the financial-markets programme director at the Initiative for Policy Dialogue at Columbia University in the US. Professor Avinash Persaud is chairman of Intelligence Capital Limited and a senior fellow at the London Business School.

Related stories on these topics:

Saverio

After having read the other article I would say Columbia 1 Harvard 0 🙂

Posted on 3/12/12 | 6:47 AM CET

Saverio

After having read the other article I would say Columbia 1 Harvard 0 🙂

Posted on 3/12/12 | 6:47 AM CET

Saverio

After having read the other article I would say Columbia 1 Harvard 0 🙂

Posted on 3/12/12 | 6:47 AM CET

Saverio

After having read the other article I would say Columbia 1 Harvard 0 🙂

Posted on 3/12/12 | 6:47 AM CET

I.C.U.

Swedish Finance Minister Anders Borg warns often that the same FTT in Sweden saw implementation costs of the tax out-run its own revenues. FTT revenues achieved 3 percent of revenue projections before subtracting reduced GDP revenue losses in all other areas.

FTT is a negative revenue tax. UK’s economic sub-committee of the House of Lords regarding Europe’s FTT proposal, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

From the UK’s European Scrutiny Committee quoting the European Commission’s FTT Impact Assessment (even before the damaging relocation effects): a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.

IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector…A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.”

The recent EFAMA study finds that if FTT were in place for 2011, it would have cost investors and pensions an astounding €38 billion for UCITS funds alone.

Analysis conducted by BlackRock finds the cascading tax will cost money market funds in Europe 7.82 percent annually, effectively destroying their existence. Equity fund yields will be reduced by 2.52 percent annually. That would reduce retirement account yields by one half over a lifetime career.

Posted on 3/12/12 | 8:01 AM CET

I.C.U.

Swedish Finance Minister Anders Borg warns often that the same FTT in Sweden saw implementation costs of the tax out-run its own revenues. FTT revenues achieved 3 percent of revenue projections before subtracting reduced GDP revenue losses in all other areas.

FTT is a negative revenue tax. UK’s economic sub-committee of the House of Lords regarding Europe’s FTT proposal, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

From the UK’s European Scrutiny Committee quoting the European Commission’s FTT Impact Assessment (even before the damaging relocation effects): a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.

IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector…A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.”

The recent EFAMA study finds that if FTT were in place for 2011, it would have cost investors and pensions an astounding €38 billion for UCITS funds alone.

Analysis conducted by BlackRock finds the cascading tax will cost money market funds in Europe 7.82 percent annually, effectively destroying their existence. Equity fund yields will be reduced by 2.52 percent annually. That would reduce retirement account yields by one half over a lifetime career.

Posted on 3/12/12 | 8:01 AM CET

I.C.U.

Swedish Finance Minister Anders Borg warns often that the same FTT in Sweden saw implementation costs of the tax out-run its own revenues. FTT revenues achieved 3 percent of revenue projections before subtracting reduced GDP revenue losses in all other areas.

FTT is a negative revenue tax. UK’s economic sub-committee of the House of Lords regarding Europe’s FTT proposal, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

From the UK’s European Scrutiny Committee quoting the European Commission’s FTT Impact Assessment (even before the damaging relocation effects): a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.

IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector…A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.”

The recent EFAMA study finds that if FTT were in place for 2011, it would have cost investors and pensions an astounding €38 billion for UCITS funds alone.

Analysis conducted by BlackRock finds the cascading tax will cost money market funds in Europe 7.82 percent annually, effectively destroying their existence. Equity fund yields will be reduced by 2.52 percent annually. That would reduce retirement account yields by one half over a lifetime career.

Posted on 3/12/12 | 8:01 AM CET

I.C.U.

Swedish Finance Minister Anders Borg warns often that the same FTT in Sweden saw implementation costs of the tax out-run its own revenues. FTT revenues achieved 3 percent of revenue projections before subtracting reduced GDP revenue losses in all other areas.

FTT is a negative revenue tax. UK’s economic sub-committee of the House of Lords regarding Europe’s FTT proposal, “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax.”

From the UK’s European Scrutiny Committee quoting the European Commission’s FTT Impact Assessment (even before the damaging relocation effects): a 3.43% fall in EU GDP equates to a fall in economic output worth €421 (£362) billion and a 0.34% fall in employment equates to a loss of 812,000 jobs.

IMF states in the Final Report For The G-20, June 2010 about the financial transaction tax, “Its real burden may fall largely on final consumers rather than, as often seems to be supposed, earnings in the financial sector…A tax levied on transactions at one stage ‘cascades’ into prices at all further stages of production.”

The recent EFAMA study finds that if FTT were in place for 2011, it would have cost investors and pensions an astounding €38 billion for UCITS funds alone.

Analysis conducted by BlackRock finds the cascading tax will cost money market funds in Europe 7.82 percent annually, effectively destroying their existence. Equity fund yields will be reduced by 2.52 percent annually. That would reduce retirement account yields by one half over a lifetime career.

Posted on 3/12/12 | 8:01 AM CET

Saverio

Dear ICU FINANCIAL SERVICES LTD, of course I’m not expecting your support to the tax since you’re the one who is going to pay for it.
Your opposition is normal but is fundamentally wrong, it would be enough to read the Impact Assessment from the European Commission (which I’m sure you know) to understand how you’re (full consciously) wrong.
Firstly, the experience of Sweden (have a look on the IA) is actually a good example on how this tax can work only if well designed and if implemented on a sufficient large area (eurozone or EU).
Secondly, revenue estimations are actually quite prudent. Revenues could be even higher than the 57 Billion per year expected. But this is not important since the FTT will also help in making the Financial market robust and solid (reducing the risk of systemic crises). And this last point, alone, would be a good reason to introduce it.
Thirdly, the effects on unemployment are really negligible. The sector has very low intensity of employment. Moreover, people like you are very skilled and will not struggle too much to find a good position.
As you can see, the FTT is actually a good tool to reduce risks of new crisis, generate revenues that will impact directly on the national budgets, and have resources to be invested in growth and job creation!

Posted on 3/13/12 | 6:41 AM CET

Saverio

Dear ICU FINANCIAL SERVICES LTD, of course I’m not expecting your support to the tax since you’re the one who is going to pay for it.
Your opposition is normal but is fundamentally wrong, it would be enough to read the Impact Assessment from the European Commission (which I’m sure you know) to understand how you’re (full consciously) wrong.
Firstly, the experience of Sweden (have a look on the IA) is actually a good example on how this tax can work only if well designed and if implemented on a sufficient large area (eurozone or EU).
Secondly, revenue estimations are actually quite prudent. Revenues could be even higher than the 57 Billion per year expected. But this is not important since the FTT will also help in making the Financial market robust and solid (reducing the risk of systemic crises). And this last point, alone, would be a good reason to introduce it.
Thirdly, the effects on unemployment are really negligible. The sector has very low intensity of employment. Moreover, people like you are very skilled and will not struggle too much to find a good position.
As you can see, the FTT is actually a good tool to reduce risks of new crisis, generate revenues that will impact directly on the national budgets, and have resources to be invested in growth and job creation!

Posted on 3/13/12 | 6:41 AM CET

Saverio

Dear ICU FINANCIAL SERVICES LTD, of course I’m not expecting your support to the tax since you’re the one who is going to pay for it.
Your opposition is normal but is fundamentally wrong, it would be enough to read the Impact Assessment from the European Commission (which I’m sure you know) to understand how you’re (full consciously) wrong.
Firstly, the experience of Sweden (have a look on the IA) is actually a good example on how this tax can work only if well designed and if implemented on a sufficient large area (eurozone or EU).
Secondly, revenue estimations are actually quite prudent. Revenues could be even higher than the 57 Billion per year expected. But this is not important since the FTT will also help in making the Financial market robust and solid (reducing the risk of systemic crises). And this last point, alone, would be a good reason to introduce it.
Thirdly, the effects on unemployment are really negligible. The sector has very low intensity of employment. Moreover, people like you are very skilled and will not struggle too much to find a good position.
As you can see, the FTT is actually a good tool to reduce risks of new crisis, generate revenues that will impact directly on the national budgets, and have resources to be invested in growth and job creation!

Posted on 3/13/12 | 6:41 AM CET

Saverio

Dear ICU FINANCIAL SERVICES LTD, of course I’m not expecting your support to the tax since you’re the one who is going to pay for it.
Your opposition is normal but is fundamentally wrong, it would be enough to read the Impact Assessment from the European Commission (which I’m sure you know) to understand how you’re (full consciously) wrong.
Firstly, the experience of Sweden (have a look on the IA) is actually a good example on how this tax can work only if well designed and if implemented on a sufficient large area (eurozone or EU).
Secondly, revenue estimations are actually quite prudent. Revenues could be even higher than the 57 Billion per year expected. But this is not important since the FTT will also help in making the Financial market robust and solid (reducing the risk of systemic crises). And this last point, alone, would be a good reason to introduce it.
Thirdly, the effects on unemployment are really negligible. The sector has very low intensity of employment. Moreover, people like you are very skilled and will not struggle too much to find a good position.
As you can see, the FTT is actually a good tool to reduce risks of new crisis, generate revenues that will impact directly on the national budgets, and have resources to be invested in growth and job creation!

Great points @Saverio. A Financial Transactions Tax (FTT) could be key in helping rebalance the economy in favour of the real economy and to protect future jobs, as suggested by BBC Business Editor Robert Peston in his article: http://www.bbc.co.uk/news/business-15148590.
Growth means more than protecting the profits of the privileged few in the financial sector. An FTT would ensure the banks pay their fair share in the crisis, and encourage longer term stability in the financial sector while raising tens of billions of pounds to help those living in poverty in the UK and abroad.

Great points @Saverio. A Financial Transactions Tax (FTT) could be key in helping rebalance the economy in favour of the real economy and to protect future jobs, as suggested by BBC Business Editor Robert Peston in his article: http://www.bbc.co.uk/news/business-15148590.
Growth means more than protecting the profits of the privileged few in the financial sector. An FTT would ensure the banks pay their fair share in the crisis, and encourage longer term stability in the financial sector while raising tens of billions of pounds to help those living in poverty in the UK and abroad.

Great points @Saverio. A Financial Transactions Tax (FTT) could be key in helping rebalance the economy in favour of the real economy and to protect future jobs, as suggested by BBC Business Editor Robert Peston in his article: http://www.bbc.co.uk/news/business-15148590.
Growth means more than protecting the profits of the privileged few in the financial sector. An FTT would ensure the banks pay their fair share in the crisis, and encourage longer term stability in the financial sector while raising tens of billions of pounds to help those living in poverty in the UK and abroad.

Great points @Saverio. A Financial Transactions Tax (FTT) could be key in helping rebalance the economy in favour of the real economy and to protect future jobs, as suggested by BBC Business Editor Robert Peston in his article: http://www.bbc.co.uk/news/business-15148590.
Growth means more than protecting the profits of the privileged few in the financial sector. An FTT would ensure the banks pay their fair share in the crisis, and encourage longer term stability in the financial sector while raising tens of billions of pounds to help those living in poverty in the UK and abroad.

Posted on 3/15/12 | 5:35 AM CET

Alan

Lets be clear, FTT was the smokescreen generated by the EC at the height of the Greek solvency crisis when neither the EC or the Eurozone member states had the fainest clue how to respond to systemic crisis rolling over the Euro. There never was any prospect of unanimity in the EU in favour of FTT -I seem to remenber reading recently that even in Germany there may not be a parliamentary consensus in favour of FTT, so not even unanimity in the Eurozone. There is no unanimity outside the EC/Eurozone either.

The problems in the’real economy’ of the eurozone remain unaddressed, just kicked down the road a bit but with Portugal now catching up with Greece as a basket case and likely to require a further bail-out or more accurately – large fiscal transfers. The markets highlighted the solvency issues in the real economies of Greece, Portugal, Italy & Spain and by implication the growing divergence of economic performance between Eurozone countries which is in turn putting the existence of the Euro into question. While flailing around for scapegoats someone landed on FTT as a solution!

FTT is based on an academic hypothesis that if will affect behaviour in the markets & the Swedish example shows that it may indeed do that but not in the way intended – a)markets will migrate to wherever they can operate outside an FTT zone b) there is consequently none impact of the impact on volatility/stability etc posited c) if FTT reduces transactions within the states adopting it there will instantly be less revenue, even ‘conservative’ projections of tax raised will turn out to be grossly exaggerated.

If markets can move out of individual coutries such as Sweden as Saverio implies they can & will equally easily move out of larger blocs such as the eurozone or at least those few countries prepared to introduce FTT

Posted on 3/20/12 | 3:00 AM CET

Alan

Lets be clear, FTT was the smokescreen generated by the EC at the height of the Greek solvency crisis when neither the EC or the Eurozone member states had the fainest clue how to respond to systemic crisis rolling over the Euro. There never was any prospect of unanimity in the EU in favour of FTT -I seem to remenber reading recently that even in Germany there may not be a parliamentary consensus in favour of FTT, so not even unanimity in the Eurozone. There is no unanimity outside the EC/Eurozone either.

The problems in the’real economy’ of the eurozone remain unaddressed, just kicked down the road a bit but with Portugal now catching up with Greece as a basket case and likely to require a further bail-out or more accurately – large fiscal transfers. The markets highlighted the solvency issues in the real economies of Greece, Portugal, Italy & Spain and by implication the growing divergence of economic performance between Eurozone countries which is in turn putting the existence of the Euro into question. While flailing around for scapegoats someone landed on FTT as a solution!

FTT is based on an academic hypothesis that if will affect behaviour in the markets & the Swedish example shows that it may indeed do that but not in the way intended – a)markets will migrate to wherever they can operate outside an FTT zone b) there is consequently none impact of the impact on volatility/stability etc posited c) if FTT reduces transactions within the states adopting it there will instantly be less revenue, even ‘conservative’ projections of tax raised will turn out to be grossly exaggerated.

If markets can move out of individual coutries such as Sweden as Saverio implies they can & will equally easily move out of larger blocs such as the eurozone or at least those few countries prepared to introduce FTT

Posted on 3/20/12 | 3:00 AM CET

Alan

Lets be clear, FTT was the smokescreen generated by the EC at the height of the Greek solvency crisis when neither the EC or the Eurozone member states had the fainest clue how to respond to systemic crisis rolling over the Euro. There never was any prospect of unanimity in the EU in favour of FTT -I seem to remenber reading recently that even in Germany there may not be a parliamentary consensus in favour of FTT, so not even unanimity in the Eurozone. There is no unanimity outside the EC/Eurozone either.

The problems in the’real economy’ of the eurozone remain unaddressed, just kicked down the road a bit but with Portugal now catching up with Greece as a basket case and likely to require a further bail-out or more accurately – large fiscal transfers. The markets highlighted the solvency issues in the real economies of Greece, Portugal, Italy & Spain and by implication the growing divergence of economic performance between Eurozone countries which is in turn putting the existence of the Euro into question. While flailing around for scapegoats someone landed on FTT as a solution!

FTT is based on an academic hypothesis that if will affect behaviour in the markets & the Swedish example shows that it may indeed do that but not in the way intended – a)markets will migrate to wherever they can operate outside an FTT zone b) there is consequently none impact of the impact on volatility/stability etc posited c) if FTT reduces transactions within the states adopting it there will instantly be less revenue, even ‘conservative’ projections of tax raised will turn out to be grossly exaggerated.

If markets can move out of individual coutries such as Sweden as Saverio implies they can & will equally easily move out of larger blocs such as the eurozone or at least those few countries prepared to introduce FTT

Posted on 3/20/12 | 3:00 AM CET

Alan

Lets be clear, FTT was the smokescreen generated by the EC at the height of the Greek solvency crisis when neither the EC or the Eurozone member states had the fainest clue how to respond to systemic crisis rolling over the Euro. There never was any prospect of unanimity in the EU in favour of FTT -I seem to remenber reading recently that even in Germany there may not be a parliamentary consensus in favour of FTT, so not even unanimity in the Eurozone. There is no unanimity outside the EC/Eurozone either.

The problems in the’real economy’ of the eurozone remain unaddressed, just kicked down the road a bit but with Portugal now catching up with Greece as a basket case and likely to require a further bail-out or more accurately – large fiscal transfers. The markets highlighted the solvency issues in the real economies of Greece, Portugal, Italy & Spain and by implication the growing divergence of economic performance between Eurozone countries which is in turn putting the existence of the Euro into question. While flailing around for scapegoats someone landed on FTT as a solution!

FTT is based on an academic hypothesis that if will affect behaviour in the markets & the Swedish example shows that it may indeed do that but not in the way intended – a)markets will migrate to wherever they can operate outside an FTT zone b) there is consequently none impact of the impact on volatility/stability etc posited c) if FTT reduces transactions within the states adopting it there will instantly be less revenue, even ‘conservative’ projections of tax raised will turn out to be grossly exaggerated.

If markets can move out of individual coutries such as Sweden as Saverio implies they can & will equally easily move out of larger blocs such as the eurozone or at least those few countries prepared to introduce FTT